Economic Commentary for July 31st, 2014: GDP Bounces Back

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The big surprise over the past week was the GDP report. The stronger-than-expected growth revealed in the GDP data was good news for the economy, but it caused mortgage rates to end the week higher.

Gross Domestic Product (GDP), the broadest measure of economic growth, increased at a 4.0% rate during the second quarter of this year. Economists had expected an increase of just 3.0%. After revisions, the negative results for the first quarter were not as bad as previously reported, going from -2.9% to -2.1%. Consumer Spending, which covers about 70% of the economy, bounced back strongly from the weather-related weakness seen during the first quarter. The consensus forecast currently is for GDP growth of roughly 3.0% for the rest of the year.

The Fed statement released this week indicated that the Fed will continue to taper its bond purchases at the previously announced pace. It will cut its purchases of new Mortgage-Backed Securities (MBS) from $15 billion to $10 billion per month. In the statement, Fed officials noted continued improvement in the labor market, but they also pointed out that much under-utilization remains. In addition, Fed officials said that inflation measures have risen a little closer to their targets, and they expect future inflation levels to remain stable. All in all, the statement contained some hawkish elements and some dovish elements, and it produced little market reaction.

Looking ahead, the important monthly Employment Report will be released on Friday. The consensus forecast is that the economy added 220K jobs in July, 2014. The Core PCE Inflation Report also will be significant. Outside the U.S., the conflicts in the Middle East and Ukraine may influence mortgage rates.

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